Options Market Hit With Data Disruptions as VIX Lurches

Data transmission was snarled in parts of the options market today as one of the biggest U.S. venues reported issues disseminating prices while the industry’s benchmark gauge swung erratically three times.

The International Securities Exchange, owned by Deutsche Boerse AG (DB1), reported difficulty sending data to the industry’s main price dissemination service, the Options Price Reporting Authority. Separately, the Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), surged and fell in a series of bursts the company later attributed to a software flaw.

While trading continued, the malfunctions illustrated vulnerabilities in American capital markets, where a series of malfunctions prompted the Securities and Exchange Commission to order bourses to collaborate on fixing errors. The SEC this year accused two of the biggest options institutions, CBOE Holdings Inc. (CBOE) and Options Clearing Corp., of supervisory failures.

“It’s frustrating that these market issues are happening so often lately,” Jon Cherry, senior vice president of derivatives trading at Chicago-based TJM Institutional Services LLC, said in an interview. “It’s across many exchanges and it’s in options and equities.”

SEC’s Concern

The SEC has questioned the quality of options market oversight, telling Chicago-based Options Clearing Corp. in September that it has “serious concern about systemic weaknesses in OCC’s risk management and operations,” according to a letter obtained by Bloomberg News. The clearinghouse guarantees all trades on U.S. options exchanges. The SEC chastised Chicago-based CBOE in June for an oversight breakdown that resulted in a $6 million fine.

ISE said its technical issue today involved the software configuration in its connection to OPRA, according to a statement. A workaround was implemented and “ISE and Opra technology teams are collaborating to restore the proper configuration,” ISE said.

NYSE Euronext (NYX)’s Securities Industry Automation Corp. oversees Opra, which administers the dissemination of trade and quote information to brokers, investors and market-data vendors such as Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News.

NYSE Euronext spokesman Eric Ryan declined to comment.

Market Share

The two U.S. options markets that ISE runs handled a combined 15 percent of the nation’s equity derivatives trading last month, according to data compiled by Options Clearing Corp.

Today’s spikes in the VIX were unrelated to the malfunction at ISE. CBOE Holdings Inc. has exclusive rights to options on the Standard & Poor’s 500 Index. Contracts on that benchmark equity gauge determine the price of the VIX.

The VIX jumped to 21.26 from 13.94 at 10:02 a.m. New York time. The next price was 13.92. The 21.26 trade was later erased from the public record. At 11:22 a.m. New York time, the VIX posted another temporary spike: up to 15.27 from 14.16, and then immediately back down to 14.17, according to data compiled by Bloomberg. It happened again at 12:19 p.m. with a jump to 19.53 and retreat to 14.31, the data show.

“These moves in the VIX index can happen occasionally and they don’t affect the trading of the underlying options and futures and they don’t have a market impact,”Bill Speth, vice president of research at CBOE, said in a phone interview.

‘Software Issue’

Later, CBOE said on its website that the unusual moves in the VIX were caused by a “software issue” that was resolved as of 1:21 p.m. New York time.

Trading malfunctions have plagued the U.S. stock and options markets since the May 2010 plunge known as the flash crash. Nasdaq OMX (NDAQ) halted trading for thousands of companies on Aug. 22 because of an error in the price feed it administers. Two days before that, Goldman Sachs Group Inc. bombarded options markets with unintended orders. On April 25, the CBOE opened for trading 3 1/2 hours late because of a software malfunction.

The errors could threaten industry credit ratings, according to Standard & Poor’s. U.S. Securities and Exchange Commission Chairman Mary Jo White ordered exchange owners on Sept. 12 to collaborate on preventing malfunctions.

The stock market saw its own disruption today. Nasdaq OMX said one of its two smaller exchanges experienced a brief technical malfunction. Trading continued, according to data compiled by Bloomberg, even though other exchanges including Nasdaq’s biggest market stopped sending orders there.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net

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